Case: 11-11109             Document: 00512161496   Page: 1   Date Filed: 03/01/2013




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                          FILED
                                                                         March 1, 2013

                                          No. 11-11109                   Lyle W. Cayce
                                                                              Clerk



In the Matter of: TEXAS GRAND PRAIRIE HOTEL REALTY, L.L.C.,

                                                         Debtor

------------------------------

WELLS FARGO BANK NATIONAL ASSOCIATION, as Trustee for the Morgan
Stanley Capital I Incorporated, Commercial Mortgage Pass - Through
Certificates Trust, Series 2007-XLF9, acting by and through its Special Servicer,
Berkadia Commercial Mortgage, L.L.C.,

                                                         Appellant

v.

TEXAS GRAND PRAIRIE HOTEL REALTY, L.L.C.; TEXAS AUSTIN HOTEL
REALTY, L.L.C.; TEXAS HOUSTON HOTEL REALTY, L.L.C.; TEXAS SAN
ANTONIO HOTEL REALTY, L.L.C.,

                                                         Appellees



                      Appeal from the United States District Court
                           for the Northern District of Texas


Before HIGGINBOTHAM, ELROD, and HAYNES, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
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                                       No. 11-11109

       Wells Fargo Bank National Association (“Wells Fargo”) appeals from a
district court decision affirming confirmation of a Chapter 11 cramdown plan.
Finding no error in the bankruptcy court’s judgment,1 we affirm.


                                              I.
       In 2007, Texas Grand Prairie Hotel Realty, LLC, Texas Austin Hotel
Realty, LLC, Texas Houston Hotel Realty, LLC, and Texas San Antonio Hotel
Realty, LLC (collectively, “Debtors”) obtained a $49,000,000 loan from Morgan
Stanley Mortgage Capital, Inc., applying the proceeds to acquire and renovate
four hotel properties in Texas. Morgan Stanley — not a party to this case —
took a security interest in the hotel properties and in substantially all of the
Debtors’ other assets. Wells Fargo eventually acquired the loan from Morgan
Stanley.
       In 2009, the Debtors’ hotel business soured. Unable to pay Wells Fargo’s
loan as payment came due, the Debtors filed for Chapter 11 protection and
proposed a plan of reorganization. When Wells Fargo rejected the proposed
reorganization, the Debtors sought to cram down their plan under 11 U.S.C.
§ 1129(b). The plan valued Wells Fargo’s secured claim at roughly $39,080,000,
in accordance with Wells Fargo’s own appraisal. Under the plan, the Debtors
proposed to pay off Wells Fargo’s secured claim over a term of ten years, with
interest accruing at 5% — 1.75% above the prime rate on the date of the
confirmation hearing.2




       1
        See In re Berryman Prods., Inc., 

, 943 (5th Cir. 1998) (“In the bankruptcy
appellate process, we perform the same function as did the district court: Fact findings of the
bankruptcy court are reviewed under a clearly erroneous standard and issues of law are
reviewed de novo.”).
       2
           The Debtors later agreed to reduce the repayment term to seven years.

                                              2
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                                         No. 11-11109

        The bankruptcy court held a two-day evidentiary hearing to assess
whether it could confirm the Debtors’ plan under § 1129(b) over Wells Fargo’s
objection. Among other things, Wells Fargo challenged the Debtors’ proposed 5%
interest rate on its secured claim. Both parties stipulated that the applicable
rate should be determined by applying the “prime-plus” formula endorsed by a
plurality of the Supreme Court in Till v. SCS Credit Corp.3 However, the
parties’ experts disagreed on the application of that formula: whereas the
Debtors’ expert — Mr. Louis Robichaux — testified that it supported a 5% rate,
Wells Fargo’s expert insisted that it mandated a rate of at least 8.8%.
        Wells Fargo filed a Daubert motion seeking to strike Robichaux’s
testimony under Rule 702, insisting that “Robichaux’s . . . failure to correctly
apply Till and its progeny show[s] that his methodology is flawed, does not
comport with applicable law, and is unreliable.” The bankruptcy court denied
Wells Fargo’s motion to strike, adopted Robichaux’s analysis as correct, and
confirmed the Debtors’ cramdown plan.
        Wells Fargo appealed to the district court, challenging the bankruptcy
court’s decision to admit Robichaux’s testimony as well as the court’s adoption
of Robichaux’s § 1129(b) interest-rate analysis. The district court affirmed and
this appeal followed. The Debtors have moved to dismiss the appeal as equitably
moot.


                                               II.
        We begin by reviewing de novo the Debtors’ equitable mootness defense.4
The doctrine of equitable mootness is unique to bankruptcy proceedings,
responsive to the reality that “there is a point beyond which a court cannot order


        3
            

(2004).
        4
            See In re GWI PCS 1, Inc., 

, 799–800 (5th Cir. 2000).

                                                3
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                                         No. 11-11109

fundamental changes in reorganization actions.”5                     To establish equitable
mootness, a debtor must show that (i) the plan of reorganization has not been
stayed, (ii) the plan has been “substantially consummated,” and (iii) the relief
requested by the appellant would “affect either the rights of parties not before
the court or the success of the plan.”6 Wells Fargo here stipulates that the first
two elements are satisfied.
       This Circuit has taken a narrow view of equitable mootness, particularly
where pleaded against a secured creditor.7 Reasoning that “the possibility of
partial recovery obviates the need for equitable mootness,”8 we have permitted
appeals to go forward even where granting full relief “could have imposed a very
significant liability on the estate, to the great detriment of both the success of
the reorganization and third parties.”9 For example, in Matter of Scopac, we
permitted secured creditors to appeal a bankruptcy court valuation order whose
reversal had the potential to — and ultimately did — impose millions of dollars
in liability on a cash-starved entity just emerging from bankruptcy.10 In Matter




       5
           In re Scopac, 

, 281 (5th Cir. 2010) (Scopac I).
       6
           

re Pacific Lumber Co., 

, 243 (5th Cir. 2009) (“Secured credit
represents property rights that ultimately find a minimum level of protection in the takings
and due process clauses of the Constitution. . . . Federal courts should proceed with caution
before declining appellate review of the adjudication of these rights under a judge-created
abstention doctrine.”).
       8
           In re Scopac, 

, 322 (5th Cir. 2011) (Scopac II).
       9
           Scopac 

.
       10
         See 

judgment of $29,700,000 to appellants). But see Scopac 

(clarifying that bankruptcy court had discretion to award less than the full
judgment if necessary to avoid “jeopardiz[ing] the reorganized debtor’s financial health”).

                                                4
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                                     No. 11-11109

of Pacific Lumber Co., we allowed a secured creditor to appeal under similar
circumstances.11
      The Debtors insist that granting relief to Wells Fargo could result in a
cataclysmic unwinding of the reorganization plan. According to the Debtors, “all
of the nearly $8 million in distributions made under the Plan, and all of the
other actions taken in furtherance and implementation of the Plan — including
transactions with third parties — will be in jeopardy of needing to be undone,
clawed back, or otherwise abrogated.” Moreover, the Debtors contend, any
money judgment against them would come out of the pockets of unsecured
creditors, as “[t]here is just one ‘pot’ of funds to distribute.” Finally, the Debtors
aver, a judgment in favor of Wells Fargo would affect the rights and expectations
of the “Equity Purchaser” — that is, the Debtors themselves — who paid a
substantial sum to acquire equity in the bankrupt entities pursuant to the
reorganization plan.
      While the Debtors’ concerns might be realized, they need not be.             This
Court could grant partial relief to Wells Fargo without disturbing the
reorganization, by, for example, awarding a slightly higher § 1129(b) cramdown
interest rate or granting a small money judgment. The Debtors present no
credible evidence that granting such fractional relief would require unwinding
any of the transactions undertaken pursuant to the reorganization plan; indeed,
by the Debtors’ own account, they are not cash starved like the debtors in Pacific
Lumber or Scopac, having enjoyed a substantial improvement in their revenues
and cash position after filing for bankruptcy.
      Nor do the Debtors present compelling evidence that granting fractional
relief would unduly burden the rights of third parties not before the court.


      11
         See Pacific 

(allowing secured creditors to appeal
valuation order whose reversal could have imposed up to $90,000,000 on a cash-poor entity
just emerging from bankruptcy).

                                           5
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                                       No. 11-11109

Though the reorganization plan ties the unsecured creditors’ recovery to the
Debtors’ projected net operating income through 2015, the Debtors’ actual net
operating income may be higher. Moreover, in fiscal years 2016 and 2017 —
after the Debtors’ payment obligations to unsecured creditors have ended — the
Debtors’ own projections show a net operating income of approximately
$3,200,000. In other words, the possibility exists that the Debtors could afford
a fractional payout without reducing distributions to third-party claimants.
      As for the Debtors’ assertion that a fractional award to Wells Fargo would
affect their interest as equity holders in the reorganized bankrupt, perhaps they
are correct. But equitable mootness protects only “the rights of parties not before
the court.”12 The fact “that a judgment might have adverse consequences [to the
equity holders of the reorganized bankrupt] is not only a natural result of any
appeal . . . but [should have been] foreseeable to them as sophisticated
investors.”13
      Unpersuaded by the Debtors’ motion to dismiss this appeal as equitably
moot, we proceed to the merits, turning first to Wells Fargo’s claim that the
bankruptcy court erred in admitting the testimony of the Debtors’ restructuring
expert — Mr. Louis Robichaux — regarding the appropriate § 1129(b) cramdown
rate of interest.


                                              III.
      According to Wells Fargo, Robichaux’s testimony is inadmissible under
Rule 702 because his “purely subjective approach to interest-rate setting”
violates the Supreme Court’s decision in Till, which “call[s] for an objective
inquiry.”


      12
           In re Manges, 

, 1039 (5th Cir. 1994) (emphasis added).
      13
           Pacific 

.

                                               6
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                                         No. 11-11109

       We review a trial court’s decision to admit expert testimony for abuse of
discretion.14 As read by Daubert, Rule 702 requires trial courts to ensure that
proffered expert testimony is “not only relevant, but reliable.”15 To determine
reliability, the trial court must make a “preliminary assessment of whether the
reasoning or methodology underlying the testimony is scientifically valid and of
whether that reasoning or methodology can properly be applied to the facts in
issue.”16 Two cautions signify: the trial court ought not “transform a Daubert
hearing into a trial on the merits,”17 and “most of the safeguards provided for in
Daubert are not as essential in a case . . . where a district judge sits as the trier
of fact in place of a jury.”18
       Here, Wells Fargo does not challenge Robichaux’s factual findings,
calculations, or financial projections, but rather argues that Robichaux’s analysis
as a whole rested on a flawed understanding of Till. As we read it, Wells Fargo’s
Daubert motion is indistinguishable from its argument on the merits. It follows
that the bankruptcy judge reasonably deferred Wells Fargo’s Daubert argument
to the confirmation hearing instead of deciding it before the hearing.19 We
pursue the same path and proceed to the merits.




       14
            Moore v. Ashland Chem. Inc., 

, 274 (5th Cir. 1998).
       15
            Daubert v. Merrell Dow Pharmaceuticals, Inc., 

, 589 (1993).
       16
            

            Pipitone v. Biomatrix Inc., 

, 250 (5th Cir. 2002).
       18
            Gibbs v. Gibbs, 

, 500 (5th Cir. 2000).
       19
           As the bankruptcy court observed, “[Wells Fargo’s] objections to Mr. Robichaux’s
testimony really go to its disagreement to the merits of his opinion, and so that disagreement
is really properly voiced as a response to the opinion itself.”

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                                       No. 11-11109

                                              IV.
       Wells Fargo claims that the bankruptcy court erred in setting a 5%
cramdown rate. We turn first to the standard under which this Court reviews
a Chapter 11 cramdown rate determination, then to its application.


                                              A.
       Under 11 U.S.C. §1129(b), a debtor can “cram down” a reorganization plan
over the dissent of a secured creditor only if the plan provides the creditor — in
this case Wells Fargo — with deferred payments of a “value” at least equal to the
“allowed amount” of the secured claim as of the effective date of the plan.20 In
other words, the deferred payments, discounted to present value by applying an
appropriate interest rate (the “cramdown rate”), must equal the allowed amount
of the secured creditor’s claim.21
       Wells Fargo contends that though a bankruptcy court’s factual findings
under § 1129(b) are reviewed only for clear error, a bankruptcy court’s choice of
methodology for calculating the § 1129(b) cramdown rate is a question of law
subject to de novo review. Wells Fargo suggests that the Supreme Court’s
decision in Till supports its position, reasoning that Till is “controlling
authority” that requires bankruptcy courts to apply the prime-plus formula to
calculate the Chapter 11 cramdown rate.
       We disagree. In T-H New Orleans, we “[declined] to establish a particular
formula for determining an appropriate cramdown interest rate” under


       20
          See 11 U.S.C. § 1129(b)(1)(A)(i)(II) (“[E]ach holder of a [secured claim must] receive
on account of such claim deferred cash payments totaling at least the allowed amount of such
claim, of a value, as of the effective date of the plan, of at least the value of such holder’s
interest in the estate’s interest in such property.”).
       21
        E.g., In re T-H New Orleans Ltd. P’ship, 

, 800 (5th Cir. 1997) (“[The
Chapter 11 cramdown provision] has been interpreted to require that the total deferred
payments have a present value equal to the amount of the secured claim.”).

                                               8
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                                            No. 11-11109

Chapter 11, reviewing the bankruptcy court’s entire § 1129(b) analysis for clear
error.22 We reasoned that it would be imprudent to “tie the hands of the lower
courts as they make the factual determination involved in establishing an
appropriate interest rate.”23 Though Wells Fargo contends that we overruled
T-H New Orleans in our subsequent decision in Matter of Smithwick,24 this
reading of Smithwick is untenable. In Smithwick, we held that bankruptcy
courts must calculate the Chapter 13 cramdown rate using the “presumptive
contract rate” approach.25 However, we reaffirmed that “[t]his court has declined
to establish a particular formula for the cramdown interest rate in Chapter 11
cases.”26 We justified our departure from T-H New Orleans in the Chapter 13
context on the ground that the need for judicial guidance is more acute in the
case of individual bankruptcies, given the “greater need to reduce litigation
expenses associated with an individualized discount rate determination.”27
Smithwick is not in tension with T-H New Orleans’s application in Chapter 11
proceedings.
       Nor is Till.          In Till, a plurality of the Supreme Court ruled that
bankruptcy courts must calculate the Chapter 13 cramdown rate by applying the




       22
          See T-H New 

; see also In re Briscoe Enters., Ltd., II, 

, 1169 (5th Cir. 1993) (“We review a bankruptcy court’s calculation of an appropriate
interest rate for clear error. Courts have used a wide variety of different rates as benchmarks
in computing the appropriate interest rate (or discount rate as it is frequently termed) for the
specific risk level in their cases.”).
       23
            T-H New 

.
       24
            

(5th Cir. 1997).
       25
            

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                                            No. 11-11109

prime-plus formula.28 While the plurality suggested that this approach should
also govern under Chapter 11,29 we have held that “[a] Supreme Court decision
must be more than merely illuminating with respect to the case before us,
because a panel of this court can only overrule a prior panel decision if such
overruling is unequivocally directed by controlling Supreme Court precedent.”30
As we recognized in Drive Financial Services, L.P. v. Jordan,31 Till was a
splintered decision whose precedential value is limited even in the Chapter 13
context.32 While many courts have chosen to apply the Till plurality’s formula
method under Chapter 11, they have done so because they were persuaded by
the plurality’s reasoning, not because they considered Till binding.33 Ultimately,
the plurality’s suggestion that its analysis also governs in the Chapter 11
context — which would be dictum even in a majority opinion — is not
“controlling . . . precedent.”34


       28
            

, 479–81 (2004).
       29
            See 

         Reed v. Fla. Metro. Univ., Inc., 

, 648 (quoting Martin v. Medtronic, Inc.,

, 577 (5th Cir. 2001) (quoting United States v. Zuniga–Salinas, 

,
1306 (5th Cir. 1991))).
       31
            

(5th Cir. 2008).
       32
          

hold that the Till plurality’s adoption of the prime-plus interest rate
approach is binding precedent in cases presenting an essentially indistinguishable factual
scenario.”); see also Good v. RMR Invs., Inc, 

, 255 (E.D. Tex. 2010) (“In Drive
[Financial], the Fifth Circuit only narrowly adopted the formula approach for Chapter 13
cases. . . . Therefore, in the Fifth Circuit, bankruptcy courts still enjoy some latitude in
determining which method should be applied to determine the cramdown interest rate in
Chapter 11 cases.”).
       33
         See, e.g., In re Am. HomePatient, Inc., 

, 567 (6th Cir. 2005) (adopting Till
plurality approach as persuasive); In re Prussia Assocs., 

, 585, 589 (Bankr. E.D.
Pa. 2005) (same); In re Cantwell, 

, 692 (Bankr. D.N.J. 2006) (same).
       34
         

(quoting 

(quoting 

)).

                                                10
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                                       No. 11-11109

      Today, we reaffirm our decision in T-H New Orleans. We will not tie
bankruptcy courts to a specific methodology as they assess the appropriate
Chapter 11 cramdown rate of interest; rather, we continue to review a
bankruptcy court’s entire cramdown-rate analysis only for clear error.


                                           B.
      At length, we turn to address whether the bankruptcy court clearly erred
in assessing a 5% cramdown rate under § 1129(b). While both parties stipulate
that the Till plurality’s formula approach governs the applicable cramdown rate,
they disagree on what that approach requires.


                                           1.
      Under the Till plurality’s formula method, a bankruptcy court should
begin its cramdown rate analysis with the national prime rate — the rate
charged by banks to creditworthy commercial borrowers — and then add a
supplemental “risk adjustment” to account for “such factors as the circumstances
of the estate, the nature of the security, and the duration and feasibility of the
reorganization plan.”35 Though the plurality “d[id] not decide the proper scale
for the risk adjustment,” it observed that “other courts have generally approved
adjustments of 1% to 3%.”36
      In ruling that the formula method governs under Chapter 13, the Till
plurality was motivated primarily by what it viewed as the method’s simplicity
and objectivity.37 First, the plurality reasoned, the method minimizes the need
for costly evidentiary hearings, as the prime rate is reported daily, and as “many


      35
           

, 479 (2004).
      36
           

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                                      No. 11-11109

of the factors relevant to the [risk] adjustment fall squarely within the
bankruptcy court’s area of expertise.”38 Second, the plurality observed, the
approach varies only in “the state of financial markets, the circumstances of the
bankruptcy estate, and the characteristics of the loan” instead of inquiring into
a particular creditor’s cost of funds or prior contractual relations with the
debtor.39
      For these same reasons, the plurality “reject[ed] the coerced loan,
presumptive contract rate, and cost of funds approaches,” as “[e]ach of these
approaches is complicated, imposes significant evidentiary costs, and aims to
make each individual creditor whole rather than to ensure the debtor’s payments
have the required present value.”40 The plurality was particularly critical of the
coerced loan approach applied by the Seventh Circuit below, noting that it
“requires bankruptcy courts to consider evidence about the market for
comparable loans to similar (though nonbankrupt) debtors — an inquiry far
removed from such courts’ usual task of evaluating debtors’ financial
circumstances and the feasibility of their debt adjustment plans.”41
      Having explained its prime-plus formula, the plurality applied it to the
case before the Court, in which the secured creditor — an auto-financing
company — objected to the bankruptcy court’s assessment of a cramdown rate
at 1.5% over prime.42 The creditor claimed that this cramdown rate was woefully
inadequate to compensate it for the risk that the debtor would default on its
restructured obligations, presenting evidence that the subprime financing


      38
           

471–72.

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                                          No. 11-11109

market would demand a rate of at least prime plus 13% for a comparable loan.43
The plurality rejected the creditor’s arguments and affirmed the bankruptcy
court’s 1.5% risk adjustment, observing that the debtor’s expert had testified
that the rate was “very reasonable given that Chapter 13 plans are supposed to
be feasible.”44
      In a spirited dissent, Justice Scalia warned that the plurality’s approach
would “systematically undercompensate” creditors.45 Justice Scalia observed
that “based on even a rudimentary financial analysis of the facts of this case, the
1.5% [risk adjustment assessed by the plurality] is obviously wrong — not just
off by a couple percent, but probably by roughly an order of magnitude.”46 As for
the plurality’s reference to the testimony of the debtors’ economics expert,
Justice Scalia noted that “[n]othing in the record shows how [the expert’s]
platitudes were somehow manipulated to arrive at a figure of 1.5 percent.”47
Justice Scalia concluded that it was “impossible to view the 1.5% figure as
anything other than a smallish number picked out of a hat.”48
      While Till was an appeal from a Chapter 13 proceeding, the plurality
observed that “Congress [likely] intended bankruptcy judges and trustees to
follow essentially the same [formula] approach when choosing an appropriate
interest rate under [Chapters 11],” reasoning that the applicable statutory
language was functionally identical in both contexts.49 However, in Footnote 14,

      43
           

J., dissenting).
      46
           

opinion).

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                                        No. 11-11109

the plurality appeared to qualify its extension of the prime-plus formula to
Chapter 11, observing that as “efficient markets” for exit financing often exist
in business bankruptcies, a “market rate” approach might be more suitable for
making the cramdown rate determination under § 1129(b).50
       In spite of Justice Scalia’s warning, the vast majority of bankruptcy courts
have taken the Till plurality’s invitation to apply the prime-plus formula under
Chapter 11.51 While courts often acknowledge that Till’s Footnote 14 appears
to endorse a “market rate” approach under Chapter 11 if an “efficient market”
for a loan substantially identical to the cramdown loan exists, courts almost
invariably conclude that such markets are absent.52 Among the courts that
follow Till’s formula method in the Chapter 11 context, “risk adjustment”
calculations have generally hewed to the plurality’s suggested range of 1% to
3%.53 Within that range, courts typically select a rate on the basis of a holistic


       50
            See 

       51
         Gary W. Marsh & Matthew M. Weiss, Chapter 11 Interest Rates After Till, 84 AM.
BANKR. L. J. 209, 221 (2010) (“Till’s formula approach, which adds the prime rate to a
debtor-specific risk adjustment, should now be considered the default interest rate for a
Chapter 11 cramdown.”); see In re Mirant Corp., 

, 821 (Bankr. N.D. Tex. 2005)
(concluding that Till is “clearly relevant” in the Chapter 11 context, and that “Till makes clear
that the market in fact does not properly measure the [cramdown rate].”); see also In re
Pamplico Highway Dev., LLC, 

, 795 (Bankr. D.S.C. 2012) (collecting cases); In re
SW Boston Hotel Venture, 

, 55 (Bankr. D. Mass. 2011) (collecting cases).
       52
         See, e.g., In re Nw. Timberline Enters., 

, 432, 435 (Bankr. N. D. Tex.
2006) (applying prime-plus formula after concluding that the evidence was insufficient to
establish the existence of an efficient market); 

(same); In re
Walkabout Creek Ltd. Divident Hous. Ass’n Ltd, 

, 574 (Bankr. D.D.C. 2011)
(same); In re 20 Bayard Views, LLC, 

(Bankr. E.D.N.Y. 2011) (same); SW Boston

(same); In re Hockenberry, 

, 657 (Bankr. S.D. Ohio 2011)
(same); In re Riverbend Leasing LLC, 

, 536 (Bankr. S.D. Iowa 2011) (same); In
re Bryant, 

, 742–43 (Bankr. E.D. Ark. 2010) (same).
       53
         E.g., In re Prussia Assocs., 

, 591 (Bankr. E.D. Pa. 2005) (“The risk
premium, per Till, will normally fluctuate between 1% and 3%.”); Riverbend 

(“[T]he general consensus that has emerged provides that a one to three percent
adjustment to the prime rate as of the effective date is appropriate.”); see also Pamplico, 468

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                                      No. 11-11109

assessment of the risk of the debtor’s default on its restructured obligations,54
evaluating factors including the quality of the debtor’s management, the
commitment of the debtor’s owners, the health and future prospects of the
debtor’s business, the quality of the lender’s collateral, and the feasibility and
duration of the plan.55


                                             2.
       Returning to the proceedings in this case, both Wells Fargo and the
Debtors presented the bankruptcy court with expert testimony on the
appropriate prime-plus cramdown rate. Mr. Louis Robichaux, the Debtors’
expert, began his analysis by quoting the prime rate at 3.25%.                    He then
proceeded to assess a risk adjustment by evaluating the factors enumerated by
the Till plurality, looking to “the circumstances of the [D]ebtors’ estate, the
nature of the security, and the duration and feasibility of the plan.” Robichaux
concluded that the Debtors’ hotel properties were well maintained and
excellently managed, that the Debtors’ owners were committed to the business,
that the Debtors’ revenues exceeded their projections in the months prior to the
hearing, that Wells Fargo’s collateral was stable or appreciating, and that the
Debtors’ proposed cramdown plan would be tight but feasible. On the basis of



B.R. at 795 (collecting cases).
       54
         Marsh & Weiss, supra note 51, at 221; see also 

(“[T]he
general consensus among courts is that a one to three percent adjustment to the prime rate
is appropriate, with a 1.00% adjustment representing the low risk debtor and a 3.00%
adjustment representing a high risk debtor”); In re Lilo Props., LLC, 

at *2
(Bankr. D. Vt. 2011) (“The Court starts with the premise that the lowest-risk debtors would
pay prime plus 1% and the highest-risk debtors would pay prime plus 3%.”).
       55
          See, e.g., SW Boston 

(examining quality of management);
Prussia 

(examining commitment of owner); Riverbend 

(examining health and future prospects of business); Walkabout 

(examining quality of collateral); 

(examining repayment term).

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                                        No. 11-11109

these findings, Robichaux assessed the risk of default “just to the left of the
middle of the risk scale.” As Till had suggested that risk adjustments generally
fall between 1% and 3%, Robichaux reasoned that a 1.75% risk adjustment
would be appropriate.
       Wells Fargo’s expert, Mr. Richard Ferrell, corroborated virtually all of
Robichaux’s findings with respect to Debtors’ properties, management,
ownership, and projected earnings. Ferrell also agreed that the applicable prime
rate was 3.25%. However, Ferrell devoted the vast majority of his cramdown
rate analysis to determining the rate of interest that the market would charge
to finance an amount of principal equal to the cramdown loan. Because Ferrell
concluded that there was no market for single, secured loans comparable to the
forced loan contemplated under the cramdown plan, he calculated the market
rate by taking the weighted average of the interest rates the market would
charge for a multi-tiered exit financing package comprised of senior debt,
mezzanine debt, and equity. Ferrell’s calculations yielded a “blended” market
rate of 9.3%.56
       To bring his “market influenced” analysis within the form of Till’s prime-
plus method, Ferrell purported to “utilize the [3.25%] Prime Rate as the Base
Rate,” making an upward “adjustment” of 6.05% to account for “the nature of the
security interest.” This calculation yielded Ferrell’s 9.3% blended market rate.57


       56
         More precisely, Mr. Ferrell determined that the market could finance the first
$23,448,000 of the cramdown loan at a rate of 6.25%, in exchange for a first mortgage on the
Debtors’ hotel properties. He then determined that the balance of the cramdown loan could
be financed through a combination of mezzanine debt, at a rate of 11%, and equity, at a
constructive rate of 22%. The weighted average of the interest rates on these three financing
tranches was 9.3%.
       57
          As Wells Fargo’s briefs on appeal implicitly concede, Mr. Ferrell thus effectively chose
the market rate, and not the prime rate, as the starting point of his cramdown rate analysis.
Cf. C.B. Reehl & Stephen P. Milner, Chapter 11 Real Estate Cram-Down Plans: The Legacy
of Till, 30 CAL. BANKR. J. 405, 410 (“[I]f the risk adjustment could take on any value, Till
would have no relevance since cram-down interest rates could be determined reverse

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                                      No. 11-11109

Mr. Ferrell then adjusted the blended rate in accordance with the remaining Till
factors, making a downward adjustment of 1.5% to account for the sterling
“circumstances of the bankruptcy estate” and an upward adjustment of 1% to
account for the plan’s tight feasibility. Ultimately, Mr. Ferrell concluded that
Wells Fargo was entitled to a cramdown rate of 8.8%.
       The bankruptcy court agreed with the parties that Till was “instructive,
if not controlling” under Chapter 11. Turning to Mr. Robichaux’s analysis, the
court concluded that “Mr. Robichaux properly interpreted Till and properly
applied it,” and that his “assessment of the circumstances of the estate, the
nature of the security, and the feasibility of the plan . . . [were] credible and
persuasive.” As for Mr. Ferrell’s analysis, the court rejected it as inconsistent
with Till’s prime-plus method:
       I disagree with [Mr. Ferrell’s] approach because it establishes a
       benchmark before adjustment that I just view to be completely
       inconsistent with Till. Till set that benchmark at national prime,
       but according to Mr. Ferrell, you first determine what level any
       portion of a loan would be financeable, and then you begin to work
       from there. . . . The Court finds no support for that type of analysis
       in Till. If anything this strikes the Court as more in the nature of
       a forced loan approach that the majority in Till expressly rejected.
Ultimately, the court determined, “[Robichaux’s] risk adjustment rate of 1.75%
is defensible, . . . especially . . . in light of the modifications to the plan which
render, in the Court’s opinion, the plan feasible.” Consequently, the court
concluded that Wells Fargo was entitled to a 5% cramdown rate.




engineered through application of other methodologies . . . . In other words, the same market
factors used to develop cram-down interest rates before Till, could now be used to determine
the value of the risk adjustment.”).

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                                     No. 11-11109

                                            3.
       We agree with the bankruptcy court that Robichaux’s § 1129(b) cramdown
rate determination rests on an uncontroversial application of the Till plurality’s
formula method. As the plurality instructed, Robichaux engaged in a holistic
evaluation of the Debtors, concluding that the quality of the bankruptcy estate
was sterling, that the Debtors’ revenues were exceeding projections, that Wells
Fargo’s collateral — primarily real estate — was liquid and stable or
appreciating in value, and that the reorganization plan would be tight but
feasible. On the basis of these findings — which were all independently verified
by Ferrell — Robichaux assessed a risk adjustment of 1.75% over prime. This
risk adjustment falls squarely within the range of adjustments other bankruptcy
courts have assessed in similar circumstances.58
       We also agree that Ferrell predicated his 8.8% cramdown rate on the sort
of comparable loans analysis rejected by the Till plurality. Wells Fargo’s briefs
repeatedly aver that the plurality characterized “the market for comparable
loans” as “relevant,” complaining that Ferrell’s analysis can “hardly be consigned
to the dustbin for considering relevant information.” However, aside from the
fact that Wells Fargo takes the quoted language out of context, the plurality
expressly rejected methodologies that “require[] the bankruptcy courts to
consider evidence about the market for comparable loans,” noting that such
approaches “require an inquiry far removed from such courts’ usual task of




       58
          See SW Boston 

(assessing risk adjustment of 1.0% over prime
for a Chapter 11 cramdown loan secured by hotel properties); In re Indus. W. Commerce Ctr.,
LLC, 

(9th Cir. BAP 2011) (assessing risk adjustment of 1.70% over prime for
Chapter 11 cramdown loan secured by commercial real property); Prussia 

(assessing risk adjustment of 1.5% above prime where “the risks attendant to the
proposed loan [were] neither negligible nor extreme”); see also 

(collecting cases).

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                                           No. 11-11109

evaluating debtors’ financial circumstances and the feasibility of their debt-
adjustment plans.”59
       Wells Fargo complains that Robichaux’s analysis produces “absurd
results,” pointing to the undisputed fact that on the date of plan confirmation,
the market was charging rates in excess of 5% on smaller, over-collateralized
loans to comparable hotel owners. While Wells Fargo is undoubtedly correct
that no willing lender would have extended credit on the terms it was forced to
accept under the § 1129(b) cramdown plan, this “absurd result” is the natural
consequence of the prime-plus method, which sacrifices market realities in favor
of simple and feasible bankruptcy reorganizations.60 Stated differently, while it
may be “impossible to view” Robichaux’s 1.75% risk adjustment as “anything
other than a smallish number picked out of a hat,”61 the Till plurality’s formula
approach — not Justice Scalia’s dissent — has become the default rule in
Chapter 11 bankruptcies.
       Notably, Wells Fargo makes no attempt to predicate Ferrell’s “market-
influenced” blended rate calculation on the Till plurality’s Footnote 14, which
suggests that a “market rate” approach should apply in Chapter 11 cases where



       59
          

. Wells Fargo also urges that Till characterized the formula
approach as an “objective inquiry,” apparently viewing this language as a ringing endorsement
of the type of quantitative market analysis performed by Ferrell. In fact, the plurality was
merely suggesting that its prime-plus approach incorporated an objective baseline — the prime
rate — and did not depend on a complicated market analysis of any specific creditor’s cost of
funds. See 

         See 

(“[U]nlike the coerced loan, presumptive contract rate, and
cost of funds approaches, the formula approach entails a straightforward, familiar, and
objective inquiry, and minimizes the need for potentially costly additional evidentiary
proceedings); 

J. dissenting) (“[T]he 1.5% premium adopted in this case is far
below anything approaching fair compensation. That result . . . is the entirely predictable
consequence of a methodology that tells bankruptcy judges to set interest rates based on
highly imponderable factors.”).
       61
            

J., dissenting).

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                                       No. 11-11109

“efficient markets” for exit financing exist.62 Footnote 14 has been criticized by
commentators, who observe that it rests on the untenable assumption that the
voluntary market for forced cramdown loans is somehow less illusory in the
Chapter 11 context than it is in the Chapter 13 context.63 Nevertheless, many
courts — including the Sixth Circuit — have found Footnote 14 persuasive,
concluding that a “market rate” approach should be used to calculate the
Chapter 11 cramdown rate in circumstances where “efficient markets” for exit
financing exist.64
       Even assuming, however, that Footnote 14 has some persuasive value, it
does not suggest that the bankruptcy court here committed any error. Among
the courts that adhere to Footnote 14, most have held that markets for exit
financing are “efficient” only if they offer a loan with a term, size, and collateral
comparable to the forced loan contemplated under the cramdown plan.65 In the
present case, Ferrell himself acknowledged that “there’s no one in this market
today that would loan this loan to the debtors — one to one loan-to-value ratio,



       62
         

n.14. Footnote 14 demonstrates that the Till plurality itself
drew a clear distinction between its “prime-plus” approach on the one hand, and a “market
rate” approach on the other.
       63
          COLLIER ON BANKRUPTCY ¶ 1129.05[2][c][i] (16th ed. rev. 2012) (“The problem with
[Footnote 14] is that the relevant market for involuntary loans in chapter 11 may be just as
illusory as in chapter 13.”); Thomas J. Yerbich, How Do You Count the Votes — or did Till tilt
the Game?, AM. BANKR. INST. J., July/Aug. 2004, at 10 (“There is no more of a ‘free market of
willing cramdown lenders’ in a chapter 11 . . . than in a chapter 13.”).
       64
          See In re Am. HomePatient, Inc., 

, 568 (6th Cir. 2005) (“[W]e opt to take
our cue from Footnote 14 of the [plurality] opinion, which offered the guiding principle that
“when picking a cram down rate in a Chapter 11 case, it might make sense to ask what rate
an efficient market would produce.”); see also Marsh & Weiss, supra note 51, at 213 (“Since
American HomePatient . . . [a] majority of courts hold that, where an efficient market exists,
the market rate should be applied, but where no efficient market can be established, the court
should apply the prime-plus formula adopted in Till.”).
       65
        E.g., In re 20 Bayard Views, LLC 

, 110–11 (Bankr. E.D.N.Y. 2011); In re
SW Boston Hotel Venture, 

, 55 (Bankr. D. Mass. 2011).

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                                       No. 11-11109

39 million dollars, secured by these properties.” While Ferrell concluded that
exit financing could be cobbled together through a combination of senior debt,
mezzanine debt, and equity financing, courts including the Sixth Circuit have
rejected the argument that the existence of such tiered financing establishes
“efficient markets,” observing that it bears no resemblance to the single, secured
loan contemplated under a cramdown plan.66
                                           ***
       The bankruptcy court in this case calculated the disputed 5% cramdown
rate on the basis of a straightforward application of the prime-plus approach —
an approach that has been endorsed by a plurality of the Supreme Court,
adopted by the vast majority of bankruptcy courts, and, perhaps most
importantly, accepted as governing by both parties to this appeal. On this
record, we cannot conclude that the bankruptcy court’s cramdown rate
calculation is clearly erroneous. However, we do not suggest that the prime-plus
formula is the only — or even the optimal — method for calculating the Chapter
11 cramdown rate.


                                             V.
       The judgment of the district court is AFFIRMED.




       66
          Am. 

; 20 Bayard 

; SW
Boston 

–58; see also Marsh & Weiss, supra note 51, at 221 (“[C]ourts have
generally been unreceptive to the use of tiered financing as a basis for establishing a market
interest rate.”).

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